The Role of Luck in Stock Market

Has it happened to you that one fine day you woke up, decided to invest into the stock market, and went ahead with full steam! You didn’t analyse the stock market much but just hooked on to your gut feeling. And, serendipitously, it turned out to be the biggest gain of your life! That day got locked in the history of your lifetime as the day that brought you riches like never before. You thanked God and your stars. Your belief in luck just got stronger!

But, there came another dreadful day. When you left everything to happenstance and without much analysis of the stocks, invested all your money into one stock, which was expected to grow. Unfortunately, your luck didn’t come to your rescue and you witnessed unprecedented loss.

Such incidents remind us of the perennially posed question – is investing into the stock market purely a game of luck or skill, or both? It has taken many experts to observe, analyse, and understand the oscillating nature of the stock market, and come out with their own opinions. But even after years of experience, nobody has been able to predict how it works precisely.

Businessmen’s belief in luckAs has been put forth, in a CNBC article, by Warren Buffet, the CEO and Chairman of Berkshire Hathaway, ‘Luck’ has been a major contributory factor in bringing him success and fortune. The article appeared on his 88th birthday, in August 2018, and he affirmed that luck’s contribution goes unnoticed and under appreciated, as a success builder, in life and in business.

It was apparent from Warren Buffet’s talks that luck appears to be the least perceptible and uncontrollable success factor. This statement was brought to light by Professor David Kass, clinical professor of finance for the Robert H. Smith School of Business at the University of Maryland, based on his notes from Buffet’s speech, taken at a 2013 graduate student event.

Tracing the legendary investor Warren Buffet’s history, who attributes luck in being born at the place where he was born, the family he was born into, and the opportunities he was presented with; it’s a wise affirmation for the investors and entrepreneurs, hoping to be as successful as Buffet, to consider luck and its important implications in the investing game. Developing a strategy, analysing the stock market trends, blending in the skill, following the processes, and embracing luck, put together can make for a gainful investment.

Buffet is not alone when it comes to attributing the building of his empire to luck. Seconding Buffet’s thoughts, eminent investor Leon Cooperman, CEO of Omega Advisors, told CNBC, that whatever success he has achieved, he thinks he has achieved it because he has had luck and good fortune by his side.

In one of his blog posts titled ‘While investing what matters more – skills or luck?’, Mauboussin writes about how luck and skill play their parts in sports and stock markets. He draws a comparison between sports such as tennis, chess, sprints, swimming and playing blackjacks or investing in stock markets. The chess, tennis players, the sprinters or swimmers need to be skilled enough to roll out a winning performance and exceed their own expectations every time. The skills need to be polished for the winning streak to continue. Luck, however, may have a trifling share in this success here.

Mauboussin further mentions that though luck does contribute when it comes to investing, and in deciding its short-term outcome, a firm process helps facilitate a stable outcome which goes a long way.

However, it may be considered that skill or luck alone, may not make the bell ring for the stock market investments. For instance, if a seasoned investor has done a thorough analysis of the market and stocks, even then he may end up losing a sizeable share of investments. Sometimes, a nouveau investor who is experimental and carries hardly any analytical skills, may reap returns of 60% in a year. Since investing is unpredictable and changes every moment, one has to tread ahead with a balanced approach.

The skilful lucky investorProminent investor Howard Marks, author of the book ‘The Most Important Thing’ has also dedicated a chapter to the role of luck in investing. He explains how luck and volatility can generate better outcomes in the financial markets and the investor can come out as a skilfully lucky one.

For instance, you may have known someone who invested into a stock randomly and it zoomed up to 1500% in a matter of two years. He may be considered an investment Guru by his friends and colleagues, including you, and consulted for stock market tips and recommendations for scripts. But you may be pondering whether he actually made money by sheer analysis or it was good luck/fortune backing him all along.

It’s apparent from such cases that randomness and luck do contribute to outcomes in the stock markets. It may bring you windfall gains or substantial losses. If the investor takes a risk and bets, based on analysis, his profit would be considered a winning move. It’s just the matter of time and that moment when he makes the decision to invest. One cannot comprehend or predict the future outcomes based on a single transaction.

It may be luck turning the tables at once for the short term gains. But in the long run, being more skillful, taking coherent decisions, along with a good trickle of luck, may do wonders in the stock market.